Exhibit 10-4 Kinked demand curves

In Exhibit 10-4, in a kinked-demand oligopoly model, D₂ represents the demand curve

Question

Exhibit 10-4 Kinked demand curves In Exhibit 10-4, in a kinked-demand oligopoly model, D₂ represents the demand curve

Quizplus · Accepted Answer

The kinked demand curve represents the idea that firms in an oligopoly have a strong incentive to match price changes by their competitors, but are less likely to initiate price changes themselves. This results in a demand curve that is steeper above the current price (D_{2) than below it (D}), creating a "kink" at the current price. This means that any price decrease below the current price is likely to result in a significant increase in quantity demanded (along the more elastic portion of the curve), while any price increase above the current price is likely to result in a significant decrease in quantity demanded (along the more inelastic portion of the curve). Therefore, option B is correct as it reflects the kinked-demand curve's responsiveness to price decreases below $50. The other options are incorrect as they do not fully capture the nature of the kinked-demand curve in this context.

Exhibit 10-4 Kinked Demand Curves